š°Introduction to Perpetual Futures
Last updated
Last updated
Most of the guide here is taken from internet. Options are not gambling they
Before knowing what perpetual are you must know what are options specifically futures.
Here is what investopedia says!
The term option refers to a financial instrument that is based on the value of underlying securities, such as stocks, indexes, and exchange-traded funds (ETFs). An options contract offers the buyer the opportunity to buy or sellādepending on the type of contract they holdāthe underlying asset. Unlike futures, the holder is not required to buy or sell the asset if they decide against it.
So basically an options contract basically gives you the power of holding an asset's value without actually holding it. The contract has everything from an expiry date of when the contract will be executed to how much and how many units/number of the underlying assets have to be sold.
At expiration the contract holder has the options whether the contract can be executed or not!
The prime difference between options and futures is that futures need the contract holder to purchase the underlying assets such as commodities or stocks on a respective date in the near future. Futures have several advantages over options in the sense that they are often easier to understand and value, have greater margin use, and are often more liquid. While the underlying maths for futures is complex and difficults to understand. It is enough for you to know that futures are always exercised in the "future"
Unlike traditional futures contracts with a fixed expiry date, perpetual futures contracts do not expire. Instead, they are designed to mimic the underlying asset's price, typically a cryptocurrency like Bitcoin or Ethereum. Here's a idea on how perpetual future's like dy / dx work
The formulas are designed to balance risk by ensuring that traders have enough collateral to back their leveraged positions, while preventing liquidation unless the market moves significantly against them. Margins scale with position size and market volatility to avoid over-leverage and protect both the trader and the platform.
Initial Margin Fraction (I): The percentage of a position's value that must be held as collateral to open a position. It limits leverage by requiring more collateral as the position size increases.
Maintenance Margin Fraction (M): The minimum percentage of the position's value that must be maintained to avoid liquidation. It ensures that an account can withstand market fluctuations.
Incremental Initial Margin Fraction: Increases the initial margin fraction for larger positions. This prevents excessive leverage as position size grows beyond the baseline.
The initial margin is proportional to the size of the position and its current value (via (S \times P)) multiplied by the risk of the market (via (I)). The absolute value ensures that margin is required whether the position is long or short.
This defines the minimum collateral required to hold the position and avoid liquidation. Similar to the initial margin but uses the maintenance margin fraction (M), which is generally lower. If the accountās value falls below the maintenance margin requirement, positions may be liquidated to protect against further losses.
Q: The USDC balance (collateral) in the account.
The value of each open position in the account. Long positions increase account value when prices rise, and short positions increase value when prices fall.
Free collateral is the available equity after accounting for the required margin. It represents how much more leverage the trader can use to open new positions.
